Termination & Suspension clauses in construction contracts

Legally speaking in a contract there is very small differences between Termination clauses and Suspension clauses. Although there is now a Statutory Right to suspend works in construction contracts for non-payment.

It is therefore imperative when agreeing a contract, particularly for the supply of goods and services a termination and suspension clause should be included, if for nothing else to ensure the reasons for suspension cannot be regarded as termination. As this would usually come about when there is some dispute and / or claim between the parties, this only seeks to reinforce the requirement for clearly defined suspension clauses, that may lead to termination, but not when first triggered.

Termination clauses in construction contracts

Standard form of contract will contain express provisions on the rights of either party to terminate the contract in defined circumstances. By way of an example, if the contract is in effect a Sub Contract and therefore a further party is the employer, an insolvency event of the employer would allow the contractor to terminate the contract with the sub contract.

Non-contractual rights to terminate

The contract is entered into and usually implies that the parties will diligently carry out the works being contracted for within prescribed timeframes and then the obligation on the other party would be to make regular payment on a fair and reasonable basis. Usually under the services being contracted for the party providing the services would be required to “carry out and complete” the services, The definition of complete will usually even be defined in its own right, so there is no ambiguity in this that can lead to dispute.

Even with these terms there can still be reasons why the contract would end up being terminated, such as the following:

Frustration

Frustration can occur when neither party has defaulted on the contract but circumstances have intervened to prevent the contract from being performed as originally intended making further performance of the contract is impossible, illegal or significantly different to the circumstances and understanding when the parties entered into the contract.

Where frustration occurs the contract automatically terminates and the parties are excused from their future obligations, although any accrued liabilities remain.

It is therefore vitally important to ensure (and in effect for both parties to agree) that frustration has occurred, justifying the termination. This would be to avoid by consequence of terminating for frustration to being in breach of contract, where frustration has not actually occurred.

By way of examples, where a contract becomes more expensive to perform through any number of issues which should have been considered as part of the negotiation of the value of the contract, this will not be a frustration event or where an event is set out as being possible and how it is dealt with is set out as an effective potential variation (change) to the contract this will not be a frustration event.   Case law gives some examples of events that are not frustrating events. The parties need to be wary of Force Majeure clauses and their potential overlap. This will be investigated further in a later post.

An event that could be regarded as frustration would be where an employer instructs an architect to design a house to be built by a Contractor on a piece of land that the employer is in the process of purchasing. If the sale of the land falls through, the contract would be frustrated as the design for will no longer be required.

Repudiation

Repudiation occurs when a party commits a breach of contract sufficiently serious that it entitles the injured party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract. If this is a material or anticipatory breach will depend upon the severity and effect of the breach, and whether it goes to the root of the contract.

Certain extreme types of breach will amount to a clear repudiation of a construction contract, such as:

  • Refusal to carry out work;
  • Abandonment of the site
  • Removal of plant by the contractor;
  • Employing other contractors to carry out the same work;
  • Failure by an employer to give access to the site.

These examples above are clear and unambiguous and grounds for repudiation. However other breaches may not be clear-cut and like frustration need to be clearly grounds to ensure that where the injured party treats the contract as repudiated as a consequence of the breach, which is not repudiatory; this will be wrongful termination and be a breach in its own right.

Whilst damages for repudiation may be higher than for other for other breaches, the parties should ensure they have that all important right to terminate for repudiation before doing so and where possible should try to utilise a more clear cut contractual right to terminate if available.

Further repudiation by one party will not by itself bring an end to further contractual obligations, the repudiation has to be accepted by the injured party. While there is no prescribed form of acceptance, it must be unequivocal acceptance by both parties. Where both parties accept the contract is repudiated, each side is released from performance of their respective unperformed obligations and damages are assessed under the normal rules and payable by the party at fault. The principle of these damages is to put the injured party in the same position they would have been in had the contract been properly completed.

However if the injured party does not accept the repudiation it “affirms” the contract is to continue, it is still entitled to claim damages for the breach but the contract will continue.

A further difficulty can be where the injured party instead of accepting repudiation, inadvertently “affirms” by their actions that contradicts acceptance or is equivocal in some way. This in itself could lead to the injured party being in breach of contract if it stops performing its obligations in the mistaken belief repudiatory breach has been accepted.

Just to confuse matters in this complex and complicated area of contract law, in some cases a breach may give the injured party the right to terminate for repudiation and a defined right under the contract.

In these circumstances the injured party does not necessarily have to elect to use one right or the other. However where exercising the contractual right is inconsistent with acceptance of repudiation, where the consequences of terminating under the contractual right are different or the response to the breach is less than unequivocal the injured party will be taken to have “affirmed” the contract and will have to rely on the contractual right rather than repudiation. As stated previously this could have consequences in relation to the level of damages for the breach.

Contractual rights to terminate

Termination clauses in contracts give parties right to terminate in certain circumstances and usually are in relation to breaches of specified contractual obligations as well as Force Majeure events which will be investigated separately.

Termination for convenience

Termination “at will” or “for convenience” wording can be inserted into a contract allowing one party to terminate without having to establish that some event has occurred or breach has been committed by the other party.

By way of an example, where an employer reconsiders the use to which land where they cannot secure financing for the whole of the project or cannot secure anchor tenants’ the contractor finds the project will be unprofitable or too risky, or the project has been suspended for a significant period with no prospect of it being recommenced could be grounds to terminate “at will” or “for convenience”. This could in effect reduce the possibility of dispute or claim later and the termination would be in the long term interests of the parties.

Traditionally this form of provision has been less common than those permitting termination for default in some of the un-amended standard forms. Employers in New Engineering Contract (NEC) 3 and the majority of Public / Private Partnerships (Private Finance Initiative and Private Finance Initiative 2) (PFI & PFI2) do have these rights usually. However, contractors and consultants are rarely given the right to terminate for convenience.

 Precedent and Compensation with terminate “at will” clauses

In these matters the only way to fully determine if the termination was legal and lawful is by having it determined by the courts. The matter could be subject to Adjudication, however the losing party would in all likelihood not accept the finding if they were to suffer financial loss.

As Public / Private Partnerships are a concept that originated in Australia, historically the English courts have looked to the Australia system for guidance around  termination “at will” or “for convenience.” It has been established through case law that in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply for the employer to obtain a better price to complete the works from another contractor. This would be consistent as in effect it’s a higher form of “subby bashing” if we take the view the Employer and Contractor as effective in a Sub Contract arrangement. Further it has been established that a contract may provide no express limitation on when, or in what circumstances, a termination for convenience clause can be operated.

To be effective, termination for convenience clauses need to provide for contractor compensation. Standard forms do contain these clauses and there is a precedent that where compensation is provided for in the contract in clear, unambiguous terms it will usually be enforceable.

The key phrase there is “clear wording” as this will be required before a termination for convenience clause can be fully effective. Unreasonable provisions, such as allowing the employer to pass work on to a third party, must be stated in clear, unambiguous terms otherwise they will be unenforceable.

The courts have also determined that the use of omissions clauses to tackle bad bargains cannot be used as an omissions clause to get out of what it now considers to be a bad bargain. It is further doubtful (although not tested) if this type of clause could be relied on exclusively by an employer to switch contractors in the event of dissatisfaction with the current contractor’s work.

Case law precedent warns us that even if the contract does contain an express provision dealing with termination for convenience trivial breaches may preclude termination and harsh objectives need clear wording otherwise termination will be seen as an intrusion on the contractor’s right to finish the work. It has further established that work transferred between contractors is questionable and an employer cannot use an omissions provision to get out of a bad bargain, and it is also doubtful it can be used if the employer is dissatisfied with a contractor’s performance a termination clause should provide for compensation to avoid being treated as unenforceable because it is unfair.

Suspension clauses

As stated at the outset there is a very close relationship between suspension and termination. Dependent on how the clause is drafted the end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period where the reason for suspension has not been removed

The issue is that when negotiating terms and conditions of a contract in an effect to ensure the termination clauses are consistent and adequately protect both parties, defined suspension terms tend to be overlooked.

Just as with termination clauses, suspension can take many forms and the onus is on what is agreed between the parties. It should be stated that the terms and mechanism for suspension should be well defined to ensure that this in itself does not result in a dispute.

One of the key reasons to suspend previously was for non-payment; this is now a statutory right with the changes in the Local Democracy, Economic Development and Construction Act [2009].

Broadly speaking the justification for suspension clauses will be similar to termination. Suspension could be a sensible mechanism for example to be used by one party where the scope and proposed outcome of a project has changed significantly but without the constraint to allow it to be developed. A suspension here for a mutually agreed timeframe would benefit both parties, if kept within certain boundaries. There could for example be agreement on a demobilisation and remobilisation cost during the suspension. This would be on the basis all parties have the desire to complete what was started, but just to a different scope. An example would be where historical artefacts are discovered that mean a proposed development has to have a significant re-design to allow for this. It would be far more sensible to suspend the works while the optioneering takes place that to let design to continue where it may only be subject to further re-design.

However it must be considered that conventional wisdom is that in the absence of an express contractual term it is difficult to argue that a general right to suspend exists in law as the courts have consistently refused to recognise such a right, save for the statutory provisions. This makes a defined suspension clause a sensible inclusion to benefit both parties.

When this clause is drafted however care needs to be taken to ensure that lifting the suspension is dealt with as well as the practical consequences of suspension and how long a contract can be suspended for before termination may occur

 

In conclusion as this is a complex and subjective area on contract law, where using these clauses you must proceed with caution. Where these clauses are going to be invoked you need to be absolutely clear that you strictly follow the contract’s notice and procedural requirements.

Advertisements

Force Majeure

Force Majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event legally termed “Act of God” (Volcano eruption, Flood, Earthquake, Hurricane etc) prevents one or both parties from fulfilling their obligations under the contract.

In practice, most Force Majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure.

The objective of a Force Majeure clause is cover occurrences beyond the reasonable control of a party, and therefore would not cover such things as the following:

  • Any result of the negligence or malfeasance of a party, which has a materially adverse effect on the ability of that party to perform its obligations
  • Any result of the usual and natural consequences of external force

An outdoor event that is called off for ordinary predictable rain requiring it to be called off will probably not be Force Majeure as the rain was foreseeable based on empirical data, such as weather patterns and the fact the event is outdoors. However in the alternative if there was a flash flood that causes damage to the venue and does not allow the event to be safely run, thereby breaching the organiser’s statutory duty of care, this would be Force Majeure.

Purpose of a Force Majeure clause

Where a contract is time-critical and / or has other sensitive contracts included they may be drafted to limit the shield of a Force Majeure clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. This type of event may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered.

A force majeure may also be the overpowering force itself, which prevents the fulfilment of a contract.

The length in time element of the clause cannot be overstated as it relieves a party from an obligation under the contract (or suspends that obligation) during the Force Majeure event. Further what is and isn’t a Force Majeure event or circumstance can be the source of much controversy in the negotiation of a contract. A party should resist any attempt by the other party to include something that should, fundamentally, be at the risk of that other party. In effect the party that is obligated to perform should be held responsible for the event and not have risk transferred. But like most negotiations the outcome depends on the relative bargaining power of the parties and there will be cases where Force Majeure clauses can be used by a party effectively to escape liability for bad performance.

As different legal systems have different interpretations of Force Majeure it is common for contracts to include specific definitions of force majeure, particularly at the international level. Some systems limit Force Majeure to an Act of God, but exclude human or technical failures (such as terrorist activities, war, communication and / or electricity interruption, industrial disputes etc). It is therefore critical in ensuring that the distinction is made in drafting of contracts to make these distinctions.

Application of common law

English common law does not automatically apply Force Majeure principles into contracts and parties who wish to have Force Majeure clauses and relief must details the terms in the contract. Frustration of purpose is however recognized although this is a narrower concept that applies when the actual performance of the contract is radically different than what the parties intended.

English courts have however interpreted a broadly meaning than just “Act of God” as a Force majeure event and judges have agreed that strikes and breakdowns of machinery may be included in Force Majeure. However negligent lack of maintenance may negate claims of Force Majeure as maintenance or the lack of regular cyclical maintenance is within the control of the assets owner.

It has also been established that Force Majeure cannot be extended to cover bad weather, such as sports matches or funerals. In the case of Matsoukis v. Priestman & Co (1915) it was held that “these are the usual incidents interrupting work, and the defendants, in making their contract, no doubt took them into account”.

Force Majeure in construction contracts

As in often the case in construction constructs particularly in relation to delay events, there is always a duty to mitigate the delay as far as reasonably possible. In the event of a Force Majeure event taking place this would still be required, but of course to a different starting point as the event was unforeseen in the general operation of the contract. In particular the parties need to pay close attention to specific notice requirements and the duty to mitigate the impact of the Force Majeure event. This is as a failure to comply with these requirements could mean you are unable to benefit from Force Majeure provisions in some circumstances.

The various forms have slightly different requirements and terminology. If we take a Force Majeure event being a shortage of labour for whatever reason, the standard forms would expect the following:

 NEC3

The relevant clause refers to an event which “stops the Contractor completing the works by the date shown on the Accepted Programme” and which:

  • Neither party could prevent;
  • An experienced contractor would have judged to have such a small chance of occurring at the time the contract was entered into that it would have been unreasonable for him to have allowed for it.

While at face value also a clause and terms that are useful to Contractors and / or Sub-Contractors, the final words could prove troublesome in an application for an Extension of Time (EoT) in a contract signed now, particularly when pandemics etc occur with some regularity that it would be difficult to discount them as having “such a small chance” of occurring.

As the Accepted Programme is crucial under the NEC form how do you “allow for” the possibility of a pandemic predicted for a date in the future that has a material bearing on the contract? If for example you allow a month into your programme, what happens if there is no pandemic?

ICE Design and Construct Contract

 The relevant clause refers to “other special circumstances of any kind whatsoever which may occur”. At face value this is a helpful cause to Contractors and / or Sub Contractor’s although what “special circumstances” could entail would be the test to be passed. Again parameters of what could be regarded as “special” would be detailed in the narrative of an amended clause.

JCT 2009 Design and Build

The JCT lists relevant events for EoT claims as well as having a Force Majeure clause. In this instance the relevant clause would be where the contract refers to “the exercise… by the UK government of any statutory power which directly affects the execution of the Works.”

FIDIC White Book

The relevant clause refers to “unforeseeable shortages in the availability of personnel… caused by epidemic”. The word “unforeseeable” could be a bit difficult here as even where, for example a virus outbreak has peaked there is a high possibility that it will return. It would be sensible to delete “unforeseeable” to avoid this potential anomaly.

As can be seen, the typical standard forms treat Force Majeure differently and in an effort to replicate the type of contracting environment that they are most appropriate to. This does make the proportionate element of the clause proportional, but of course never all encompassing.

Force Majeure clauses in bespoke contracts

A Force Majeure clause that lists examples is better than an undefined clause, but at the same time it would be impossible to detail a list that covered every potential eventuality.

Therefore a sensible solution would be to define Force Majeure acts along the lines of acts and events beyond the control of the parties rather than listing specific examples. The parties then will debate if an event that is unforeseen takes place is a Force Majeure event when the event takes place. The difficulty could be where Force Majeure is not a legal term and is open to interpretation. The party who wishes to rely on the clause will have to convince the adjudicator or court that their circumstances fall within force majeure.

Despite the observation made in relation to wording a definition in a bespoke form above, it was always be remembered that Force Majeure will always be seen as beyond the control of the affected party. It is important to remember that this is not the same as unforeseeable as under some of the standard forms also considered above. The test to satisfy will be that even if you had done all that was to be reasonably expected you would still have been affected.

In an individual case the parties, court or arbitrator will look at whether something is or is not force majeure based on the facts as presented to them and where this is being used to enforce a right under the contract such as termination, it will always be worth evaluating other clause in the contract to affect the same remedy.

Anti-Force Majeure clauses

It would generally be expected that most Employers accept that the Contractor will be unable to perform its obligations in a “genuine” Force Majeure situation, such as an earthquake. Their concern is more around Force Majeure clauses being used in a situation that are commercial in nature or that could have been avoided by taking reasonable precautions.

While this is outside of the type of examples that we have considered as part of this post, there are situations where “genuine” Force Majeure will not be regarded as sufficient cause for failure to perform.

This is in relation to essential services such as emergency services, their facilities and suppliers (healthcare and caring professions) and essential industries such as water and sewage treatment, power supply, waste collection, telecommunications, parts of Government and the military. Where services fall into this category, the Force Majeure clauses tend to look very different and rather than looking to end a matter is based around the parties meeting promptly to rectify the issues where possible, as opposed to arguing about what can’ be done. This would also give opportunity to suspend certain procedures while they are rectified, such as when electricity lines are blown down or where the internet and telephone lines go down.

Is there a lesson here?

Can this significantly different approach to Force Majeure that has to be implemented by effective necessity by the emergency services be a good approach across the board?

In reality it’s a good place to start where a project is affected by a crisis that has been unforeseen. Rather than heading into a potential dispute situation it would be better for the parties to come together and see what can be done to resolve the issues, the timescales and even costs (even if Order of Magnitude)  rather than what cannot be done.

A typical Force Majeure clause

How would a Force Majeure clause be worded? In reality it would be to suit the type of contract being entered into. This is an example is of how force majeure might be described:.

  1. FORCE MAJEURE

A party is not liable for failure to perform its obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalisation, government sanction, blockage, embargo, labour dispute, strike, lockout or interruption or failure of electricity or telephone service. No party is entitled to terminate this Agreement under Clause 38 (Termination) in such circumstances.

If a party asserts Force Majeure for the failure to perform the party’s obligation, then the non-performing party must prove that the party took reasonable steps to minimize delay or damages caused by the foreseeable events, that the party substantially fulfilled all non-excused obligations, and that the other party was timely notified of the likelihood or actual occurrence of an event described in Clause 40 (Force Majeure).

Unfair contract terms in the Consumer Rights Act

In a recent post we outlined the changes that took effect in sales and services legislation with the passing of the Consumer Rights Act [2015]. We are going to examine unfair terms in this post and your rights.

When you enter into a contract; as a buyer, seller or for a service; both parties must follow the terms set out in that contract. Probably the best way to ensure you do not have unfair terms is to take the time to read and terms & conditions of a contract you are going to enter into, to avoid problems later. However there is statutory protection against unfair terms.

 What are your rights to challenge unfair terms

Generally companies are free to use whatever contractual terms and conditions they consider to be reasonable, provided they are not in themselves unfair or contradict statutory law and provisions.  As a result of this being a new item of legislation the existing rules operate alongside the rules for a time. In effect until all new contracts were entered into under the Consumer Rights Act [2015]. The rules in relation to which legislation covers your contract are as follows:

  • For contracts entered into after 1st October 2015, these are governed by the Consumer Rights Act [2015]
  • For contracts entered into before 1st October 2015, these are governed by the Unfair Terms in Consumer Contracts Regulations (1999).

While these are two different pieces of United Kingdom legislation in effect over the same or similar issues and where one supersedes the other. Both are premised by a clear legal view that you are not bound by a standard term in a contract, with a seller or supplier if that term is judged to be unfair.

As a consumer, if you think a standard contact term is unfair to local authority trading standards department or to the Competition and Markets Authority (CMA) which replaced the Office of Fair Trading (OFT) as the regulator in April 2014.The CMA is empowered to investigate and ultimately can force a company to change its terms.

As an individual or corporate entity you also have the right to challenge a contract term if you think it’s unfair. However in this instance only the courts can rule whether a term is fair or unfair.

 Terms you can challenge

The Consumer Rights Act [2015] allows you the statutory right to challenge hidden fees and charges as the basis of the legislation is that key terms of a contract, including price, may be assessed for fairness unless they are both prominent and transparent.

This is a significant departure from the previous Unfair Terms in Consumer Contracts Regulations [1999] were these type of terms were exempt from a fairness test if they were written in plain language. Of course what is plain language is in itself a leading and ambiguous terms

Terms may be ruled as unfair where:

  • They are contrary to the requirements of good faith, meaning they must be designed, negotiated and entered into with the consumer in a fair and open way
  • They cause a significant imbalance between the rights of the retailer and consumer to the detriment of the consumer

Terms you can’t challenge

All of the contract terms (including core terms) must be in intelligible and plain language or they are open to challenge as unfair. However you could not make a challenge to terms for the following reason under either the old Regulations or the new Act:

  • By finding the same product elsewhere at a cheaper price than you have agreed to pay
  • Claim that a contract for an extended warranty is unfair because it offers less cover than an extended warranty you could have bought for a similar price
  • Challenge terms that you have negotiated directly with the seller as these would have been agreed between the parties in good faith. In effect you can only challenge standard terms and conditions that you believe to be unfair

Terms deemed to be unfair

Some of the most common unfair terms that are sneaked into standard terms and conditions and that can be challenged are the following:

 Unbalanced rights

Contract terms that confer greater rights to the seller / trader than to you as the consumer enjoy, such as where in an on-going contract the trader can change a term and condition of your contract with one-week notice, but you must give six months’ notice to terminate a contract.

 Excessive cancellation fees

These are terms that allow the trader to take too much of your money if you end a contract before it has run to its term. If you choose to end a contract using a clause in the terms and conditions that allow you to do this, the trader can claim for administration and marketing costs and for any work they had started and loss of profit. They cannot charge for punitive damages, such as paying up what you would have expended until the end of the natural life of the contract.

 Changing goods or services

A trader cannot have a term that allows them to change significantly what you are buying without giving you the chance to withdraw from the contract. For example, if you order timber frame windows for your house and want matching doors, the trader cannot decide to give you PVC doors and timber frame windows, without giving you the chance to cancel your order and get a refund.

Changing the price

The seller’s terms and conditions may state your order is accepted only when it starts fulfilling the order from its shelves and you’ll be charged the price of the goods at that time. However, a contract term that states you must pay a higher price if prices rise after you’ve ordered could be considered unfair.

 

Of course companies will try new ways to circumnavigate the legislation and these are only ever struck down when challenged, so while these are current terms that are able to be challenged, there may be others and we may revisit this subject again.

However the basic rule of thing would be to view against the criteria detailed above, particularly against being balanced, because these are the easiest terms to try and marginally skewer to have that unfair advantage.

Implied Terms in Contracts

With the United Kingdom having shaken up the selling of goods and services with the passing on the Consumer Rights Act [2015], it will be interesting to look at a case that was appealed to the Court of Appeal and see if anything different would or could happen under the new legislation.

The case of Lowe and Another v W Machell Joinery Ltd [2011] EWCA Civ 794 shook up the law with regard to terms implied into contracts.

Backgrounds

Mr and Mrs Lowe converted a barn for residential use and placed a number of orders with W Machell Joinery Limited. Crucially this was done during a conversation with no formal written quotation. The element of this order that led to this case was a bespoke, elaborately designed wooden staircase costing £16,000 (Exclusive of Value Added Tax).

The Lowe’s paid for the staircase on 4th June 2009 and it was delivered to their property on 5th June 2009. However on 12th June 2009 the Lowe’s rejected the staircase by letter and had another staircase supplied by another company. It was claimed by the Lowe’s that they were entitled to reject the staircase because the verbal contract with W Machell Joinery Limited included the installation of the staircase and it should have been installed.

Mr and Mrs Lowe issued proceedings to recover the price of the staircase in July 2009.

Technology and Construction Court (TCC) decision

The trail was heard in July 2010 and by this time the Lowe’s relied on further reasons justifying their rejection of the staircase which included that had the staircase been installed, it would not have complied their Building Regulations.

At the TCC hearing in Leeds, Yorkshire the judge held that the original reasons for rejecting the goods were unjustified.  However, he further held that W Machell Joinery Limited were in breach of contract as the staircase did not comply with Building Regulations. However this breach was not sufficient justification for the Lowe’s to reject the staircase as he reasoned it would have been easy to modify the staircase in a number of ways to ensure compliance with Building Regulations.

The judge therefore dismissed the claim and you would expect this to be the end of the matter.

Court of Appeal

Mr and Mrs Lowe appealed against the decision to the Court of Appeal.

Here they raised an argument on appeal that was not fully relied upon in the original trial. This being that Section 14 of The Sale of Goods Act [1979] implied terms into the contract between the parties which W Machell Joinery Limited subsequently breached entitling the Lowes to reject the staircase.

Section 14(2) of the Act provided that where goods are sold by a seller in the course of a business transaction there is an implied term that the goods are of satisfactory quality.

Section 14(3) provided that when goods are sold by a seller in the course of a business transaction where the buyer makes the seller aware that the goods have a particular purpose, a term is implied that the goods are fit for the purpose for which they have been supplied.

Therefore the Lowe’s also argued the term should be implied into the contract between the parties that the staircase would comply with the relevant Building Regulations and British Standards.

Court of Appeal Decision

The Court of Appeal found that there was a breach of contract and overturned the decision handed down in the TCC where he found this breach entitled the Lowes to reject the staircase.

The Judge found that the breach of the contract was of the implied terms that the staircase had to be of satisfactory quality and, because J Machell Joinery Limited was aware that the barn was to be converted to residential use, it needed to be fit for purpose as required by the Act.

The Court found “fit for purpose” included compliance with Building Regulations and therefore there was an implied term that the staircase would comply with the relevant Building Regulations and British Standards, albeit under cover of “fit for purpose”.

While the only way to see if this would hold true under the Consumer Rights Act [2015] as the legislation still requires these tests, it is highly likely a similar case would result in the same outcome.

Is this fair?

W Machell Joinery Limited contracted with the Lowes to supply a staircase that did not comply with Building Regulations. Further W Machell Joinery was not responsible for obtaining Building Regulation approval for the staircase.  Yet to show how obtuse the law can be, if W Machell Joinery Limited changed the specification of the staircase to be compliant with Building Regulations, this would not be compliant with the design requested by the Lowes. Therefore either way, J Machell Joinery Limited would be in breach of contract.

The solution to this anomaly from the Court of Appeal to avoid this situation was that W Machell Joinery Limited should have made the Lowe’s aware the staircase was not compliant with Building Regulations before it had been manufactured.  The Lowe’s would have had the choice to continue with the design and risk the staircase not complying with Building Regulations, or to alter the design to make it compliant.

Implied terms generally

From a construction industry perspective both The Housing Grants, Construction and Regeneration Act [1996] as amended by The Local Democracy, Economic Development and Construction Act [2009] and The Supply of Goods and Services Act [1982] as superseded by the Consumer Rights Act [2015] imply terms into construction contracts.

Housing Grants, Construction and Regeneration Act 1996

This Act implied terms which included:

  • Entitlement to stage payments
  • Limit to right to withhold payment
  • The right to refer disputes to adjudication
  • Mechanism for payment, including payment date and notice of amount
  • Prohibiting conditional payment provisions
  • Right to suspend for non-performance

If the above provisions were not included in a construction contract, the Scheme for Construction Contracts applies, in effect being the implied terms.

 Supply of Goods and Services Act 1982 
This Act implied terms that:

  • Service will be carried out with reasonable care and skill
  • Supplier will carry out the service within a reasonable time
  • Supplier will be paid a reasonable charge

These are still required under the Consumer Rights Act [2015].

Further the courts are empowered to also imply terms into contracts, and these fall into two categories:

  1. Where a contract has been entered into between the parties, to make the contract work successfully a term needs to be implied into the contract.  For example, the language may be ambiguous and require clarifying; and
  2. In construction contracts there are certain usual terms that are implied unless the parties wish to exclude or change these implied terms.  An examples of these implied terms for would be that the parties will co-operate with each other, and that the parties will not prevent completion from taking place.

Can you prevent the Lowe v W Machell Joinery Limited happening?

The primary issue that allowed the dispute to reach the conclusion it did was that no written contract or terms of agreement existed between the parties, setting out the contract terms and what was to be delivered.

Where there is supply or manufacture and supply of high value items you should always draft a contract which details the obligations and liabilities of each party.

This will enable both parties to understanding their duties and obligations and hopefully avoid disputes arising in the future.

Further this will prevent terms being implied into contracts which were not the parties’ intentions at the time the contract was made. In reality the material fact there was no written document allowed the Lowe’s to have the court rule in their favour on matters that were unforeseen at the time of agreement to supply the staircase.

Ansell Murray Limited has experience of drafting bespoke contracts as well as ensuring standard forms are correctly assembled.

Secured and unsecured creditors

Following on from the previous post of bringing a Winding up Petition where a company is unable to pay its debts and on the assumption that the Winding up Petition is successful, a Liquidator will be appointed to bring the companies affairs into order and close down the company.

There then exists a hierarchy of creditors and these receive payment from the surplus funds of the company after the Insolvency Practitioners fees have been settled.

In simple terms you are either a secured creditor or an unsecured creditor with secured creditors being paid first.

 Secured creditors

A secured creditor is usually a bank or other asset-based lender that holds a fixed or floating charge over a business asset or assets. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor.

Secured creditors fall into two subcategories:

  • those with a fixed charge on an asset / assets of the business
  • those with a floating charge

 Fixed charge

A fixed charge may be held over a specific asset which was financed by the lender, for example business premises, vehicles, or machinery and equipment which may have been purchased in this way. The company has a statutory duty to register these charge / charges with Companies House, where they become a public record.

A further common example of a Fixed Charge are Factoring companies, used to provide an injection of cash. These companies “buy” the company’s sales ledger, which is the asset over which the charge is held.

 Floating charge

A floating charge is a security over a fund of changing assets of a company, such as shares. It floats over the asset until the point at which it is converted into a fixed charge, known as crystallization.

Crystallization usually triggers by an implied term in the Documents over which the security is held and stops the company’s “right” to deal with the asset / assets, such as insolvency proceedings. In the event of insolvency, the creditor holding the floating charge will be placed after those with a Fixed Charge. This holds true as long as the charge was registered after 15th September 2003.

Registering a floating charge provides the lender with some security for the loan, but not on a specific asset as with a fixed charge.

 Unsecured creditors

Unsecured creditors include suppliers, customers, HMRC and contractors and are one of the last groups to be paid, being placed above the shareholders of the company. It is often the case that this group receives little money, if any, from the distribution of assets once all other creditor groups have been paid.

Generally unsecured creditors rank after secured and preferential creditors, where preferential creditors are generally employees of the company, entitled to arrears of wages and other employment costs to certain limits.

This is why unsecured creditors feel they have little involvement or influence during insolvency proceedings compared with secured and preferential creditors.

They are consulted during the initial stages when the creditors’ meeting is called to provide them with formal notification of the company’s financial position, and to vote on the appointment of the Insolvency Practitioner.

After that it’s just a case of waiting until payment (if any) is made to them.

Winding Up Petitions

The world is full of many different types of people, the majority good, honest and decent but there are also those that are the opposite that cannot see their own failings and are dishonest and strangers to the truth. People who will tell you bare faced lies knowing that they will be exposed for what they are in the future but are hell bent on trying to stop giving you what you are legally entitled to.

You come across people like this in the business world all the time, some of the world biggest crooks have carefully created an imagine of standing up for the little man, while in reality robbing them blind. Robert Maxwell is probably the best contemporary example, a Labour Party Member of Parliament who stole his employees’ pension contributions and committed suicide before being brought to book for his actions.

As in the past I have had a company go insolvent whilst owing me a considerable sum of money I tend to advise that at the first sign of financial trouble at a firm, be robust in ensuring you get paid monies you are legally due. The operative word here is “LEGALLY DUE.” Any arguments about the debt being legally due could and in all probability will mean the court is not satisfied it has been proven and the case will be dismissed. Where this happens the petitioner will have all costs awarded against them to pay. This can be extremely expensive.

Perhaps the shortest route to get the attention of these types of businesses and the people behind them if to issue a “Winding up Petition.” Although many regard this as a last resort, I regard it as the second resort after robust request for payment. This robust method should be Warning letter and Final Demand as in essence a Winding up petition says “can’t pay” rather than “won’t pay.” Although there is little difference in reality between these two positions.

What is a winding up petition?

A winding up petition is essentially the “nuclear option” in that it is making a request to the court to rule that the company is unable to pay its debts, it is insolvent and therefore should stop trading. Issuing a winding up petition is perhaps the most effective way of getting paid what you are legally due as long as the company is not close to bankruptcy.

Whilst it should not be used as a “debt collection tool” and should not be used to settle disputes in the normal turn of events. If you believe the company is effectively bankrupt and therefore trading fraudulently it is a mechanism that can work effectively. By way of an example, Ansell Murray Limited represented a party as the Referring Party in an Adjudication. The Responding Party acted unscrupulously at every turn, as they had done through the duration of the contract that led to the dispute. The Adjudicator required the Referring Party to pay his fee in full prior to issuing his Determination, which was done. The Determination ruled that Ansell Murray Limited’s client was entitled to all the monies claimed, Interest and Compensation in accordance with the Late Payment of Commercial Debt Regulations and crucially all of the costs that had been paid to the Adjudicator.

In effect everything that we requested. When the final date for payment came and went without any payment we wrote and advised that a Winding up Petition would be presented without further notice if the monies were not paid in full. The Winding up Petition was lodged with the Insolvency Court and as you are not allowed to advertise the petition for 7 days we knew this would be the acid test, as if they did not pay they would be wound up. Luckily for Ansell Murray Limited’s client, full payment was made within 7 days, meaning a hearing was not required. The company had to pay all our costs of bringing and then removing the Winding up petition as well.

However as a post script within 6 months the company had collapsed. Ansell Murray Limited unwittingly played its part in this as the company was simply refusing to return retention monies and this was helping in part to keep it afloat. Our payment, although only £35,000 holed their cash flow below the water line and they were unable to recover.

Interesting a large number of Creditors had gone down the route of making a claim in court, which they had won in the period after our Adjudication. Many never saw any of the monies they were due.

A Winding up Petition as the “Nuclear option” is expensive option and most importantly the amount due must not be in dispute in any way. Tax debts by default are generally not disputed, therefore Her Majesty’s Revenue and Customs (HMRC) use this method frequently. HMRC account for approximately 60% of all Winding up petitions issued.

 Process of issuing a winding up petition

Typically a creditor asks a solicitor to “wind the debtor company up” to recover debts, or to stop the company making its debts worse. The minimum threshold for commencing a Winding up is undisputed debt of over £750.

The application (the Winding up Petition) is made to the High Court asking the court to wind the company up at some point in the future.

A hearing date to “hear” the petition will be scheduled and this is usually 30-75 days between the petition being lodged and the actual court hearing date.

The process is legalistic and technical but requires quick action by the Directors of the company being petitioned.

Once a petition has been presented the Directors of the petitioned company cannot put the company into voluntary liquidation, undertake a pre-pack administration or dispose of company assets and the company cannot be sold. So in effect the Directors lose control.

Seven days after serving the Winding up petition, usually at its registered office; the petitioner who is the creditor that issued the petition can advertise it in the London Gazette. As banks monitor the London Gazette an advertised Winding up Petition will usually mean the company’s bank account is frozen.

If the company does not respond, or if no defence is mounted, then it is usually a matter of the judge issuing a “Winging up Order” and the process of ending the company as an entity begins.

What is important then is the status of Creditors and this will be examined in greater detail in the next post.

However if the court thinks that you are just trying to kill the company as you are a competitor then it will give the company more opportunity to try and restructure itself and can even occur where the legality of the debt is proved.  The court has to look at the position of other creditors as well. In the case of Dollar Land (Feltham) & Ors [1995] BCC 740 reported that a winding-up order should be rescinded if there was a real prospect that a Creditor Voluntary Arrangement (CVA) would be approved by the creditors and determined that the CVA majority would decide.

 As mentioned previously the advertising of a Winding up Petition has the effect of the Directors losing control of the company and where there is an appetite to pay normal expenditure such as wages and salaries this cannot happen without application for a Validation Order.

What is a Validation Order?

As mentioned banks usually freeze a company’s bank account when a Winding up Petition is served. A Validation Order is where the company has gone to the courts to apply to have the bank account unfrozen. Where granted, the Liquidator (Person appoint to wind down and close the company if the Winding up Petition is successful) is prevented from holding the bank liable for any monies withdrawn after the order is granted.

The application for a Validation Order is brought under Section 127 of the Insolvency Act [1986] as the act states “unless the court otherwise orders” whereby the court may allow disposition of the company assets, including withdrawals from a bank account

The Judge will require extensive evidence as to why the Court should grant the order. The evidence and information the Court will require is generally but not limited to the following:

  • The reason the petition was issued and the circumstances around this
  • Whether the petition debt is admitted or disputed. If disputed details of the basis on which the debt is disputed
  • Details of the company’s financial position (Details of its assets, including details of any security and the amount /amounts secured and liabilities. These details would need to be supported by documentary evidence e.g. the most recent filed accounts, draft audited accounts, management accounts
  • A cash flow forecast and income and expenditure projection for the period for which the order is sought
  • Details of the dispositions or payments in respect of which the order is sought
  • The reasons needed for such dispositions or payments to be made
  • Any other relevant information to the exercise of the court’s discretions

The Court will need to be satisfied by this evidence the company is solvent and able to pay its debts as they fall due or that the order sought will be beneficial to or will not prejudice the interests of all the unsecured creditors.

Dismiss a winding up petition

There are a two primary ways of having the Winding up Petition dismissed, such as:

  • Reaching agreement and / or paying the amount claimed before the Winding up Petition is advertised or before the hearing date.
  • The Debt cannot be proven

In the next post we will investigate the position of secured and unsecured creditors.